The US dollar experienced a notable decline across various currencies on Monday following former President Donald Trump’s comments to CBS, suggesting a potential quick resolution to the ongoing conflict. Market participants reacted by unwinding several positions, leading to a recalibration of previously bullish interest-rate expectations and applying pressure on the dollar. The currency extended its losses the next day, bolstered by a shift in market sentiment toward risk. However, this downward trend reversed in the evening when reports surfaced indicating that US intelligence sources had detected signs of Iran potentially preparing to lay mines in the strategically vital Strait of Hormuz. With the prospects for a swift resolution diminishing, demand for the US dollar intensified.
Looking ahead, the US Consumer Price Index (CPI) report is on the financial agenda. Given the prevailing focus on the armed conflict, it is anticipated that investors might overlook a softer-than-expected CPI reading, viewing it as already outdated data. Conversely, if the report reveals unexpectedly high inflation, it could engender a wave of risk aversion. Investors may become concerned that if inflation was already on the rise before the conflict broke out, escalating oil prices could exacerbate the issue in the coming months.
On the European front, officials from the European Central Bank (ECB) have emphasized the need for patience, advising caution against reacting hastily to developments in the Middle East. The upcoming ECB policy meeting next week is expected to result in no changes to current monetary policy. Markets are pricing in a 55% likelihood of a rate hike in June, leaving traders eager to discern if a hike is genuinely on the table and under what circumstances it might occur. Should the US-Iran conflict persist, the possibility of an interest rate increase could place additional downward pressure on the euro, impacting stock markets and overall economic activity.
Analyzing the EUR/USD pair, several insights emerge from the technical charts. On the daily timeframe, the currency pair has dipped below a significant swing level at 1.1575 but has been unable to sustain further declines. For sellers, a more favorable risk-reward setup exists around the downward trendline, potentially paving the way for a move towards the 1.14 level. In contrast, buyers looking for price appreciation will be eyeing a decisive break higher that could open doors toward the 1.20 level.
Examining the situation on a four-hour chart reveals a rangebound price action where the 1.1655 level has emerged as a strong resistance point. Sellers are expected to continue entering around this resistance level while maintaining defined risk parameters to push lower. Meanwhile, buyers are seeking a break above this resistance to increase bullish positions.
Zooming in further on the one-hour timeframe illustrates a minor downward trendline, which reflects the current bearish momentum. Should there be a pullback, sellers are likely to take advantage of the trendline as a resistance point, with defined risk levels positioned higher. Buyers, however, will look for a breakthrough to target the major downward trendline near the 1.1720 level. The highlighted red lines indicate the average daily trading range anticipated for the day.
As for upcoming economic catalysts, today marks the release of the US CPI report, followed by jobless claims figures tomorrow. The week will round out with the US Personal Consumption Expenditures (PCE) price index, the University of Michigan Consumer Sentiment survey, and job openings data on Friday. However, it is crucial to note that the current market focus appears heavily skewed towards the US-Iran conflict, potentially overshadowing the impact of these economic data releases.
